Find the risk premium and explain its significance.
For this paper, you need to go to FRED (https://fred.stlouisfed.org/) and download four interest
rate series from January 1, 2004 through the end of 2020. I will post a video about how to do
These rates are:
• The effective Federal Funds Rate (EFFR)
• The 10-year Treasury bond yield (DGS10)
• Moody’s 10-year seasoned AAA bond yield (DAAA)
o These are the highest rated (safest) corporate bonds
• Bank of America’s BBB bond yield (BAMLC0A4CBBBEY)
o These are corporate bonds with much higher risk of default
This will allow you to recreate Figure 6-3 with updated data (and the addition of the FFR):
• You will also want to download the data for Real Gross Private Investment (GPDIC1).
In a well-written essay, explain what happened to the risk premium during the financial crisis in
2008 and how that affected private investment and if there were similarities in 2020 in the
pandemic recession. Make sure to answer the following questions in your essay.
• Which of these interest rates does the Federal Reserve target directly and how did they
respond to the financial crisis?
ECN327: Intermediate Macroeconomics, Summer 2021
• Which bond yields increased the most?
• What happened to the yield of the 10-yield Treasury bonds and why?
• If the BBB risk premium is defined as the difference between the BBB bond yields and
the Treasury bond and the AAA risk premium is the difference between the AAA bond
yields and the Treasury bonds, which increased more?
• How was real private investment affected in the financial crisis?
• Finally, were there any similarities in 2020 to the 2008 financial crisis? If so, what?
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